A STUDY ON WORKING CAPITAL MANAGEMENT

AT

A.V.THOMAS ALLIED & LEATHER PRODUCTS PVT LTD

 CHAPTER – I
INTRODUCTION
 CHAPTER - I

INTRODUCTION

All business organizations prepare financial statements after every financial year. The
financial statements clearly indicate the financial position of the business concern. Published
financial statements may be of considerable interest to shareholders, trade organizations,
business analyst and many others. Each of these groups may be interest in different aspects of the
business concern according to their own purposes.

The basis for financial planning, analysis and decision making is the financial
information. Financial information is needed to predict, compare and evaluate the firm‟s earning
ability. It is also required to aid in economic decision making investment and financing decision
making. The financial information of an enterprise is contained in the financial statements or
accounting reports.

The financial analysis is the process of analyzing the financial strengths and weaknesses
of the firm by properly establishing the relationships between the items of the balance sheet and
profit and loss account. It is the study of the performance of the unit and therefore is aimed at
financial performance of an individual unit.

Working Capital is the capital required for the day-to-day operations of the business It
may be regarded as the life blood of business. Its effective position can do much to ensure the
success of a business, while its inefficient management can lead not only to loss of profit but also
the ultimate downfall the study o f working capital management is important because of its close
relation with the day to day operations of the business Therefore to keep healthy management of
working capital business needs professionalism and good skill thus the management of working
capital varies from industry to industry.
1.1.1 DEFINITION

According to Shubin working capital is defined as, “Working capital is a part of capital
which is required for purchase of raw materials and for meeting day-to-day expenditure on
salaries, wages, rent and advertising etc”.

1.1.2 MEANING

Working capital means the funds (i.e., capital) available and used for day to day
operation of an enterprise. It consists broadly of that portion of assets of a business which are
which is major purpose of an existence firm said during an accounting period to generate a
current income of a firm.

1.1.3 KINDS OF WORKING CAPITAL

1. Gross Working Capital

According to this concept of working capital refers to a firm‟s investment in current

assets. The amount of current liability is not deducted from the total of current assets. This
concept view working capital and aggregate of current assets as two interchangeable terms. This
concept is also to as “current capital” or “circulating capital”.

2. Net Working Capital

The net working capital refers to the difference between current assets current liabilities.
Current liabilities are those claims of outsiders which are expected to nature for payment with in
an accounting year and include creditor‟s dues, bills receivable bank overdraft and outstanding
expenses. Net working capital can be positive or negative. A positive net working capital will be
arise current assets exceeds current liability. A negativenet working capital occurs when
liabilities are in excess of current assets.
3. Negative Working Capital
When current liabilities exceed current assets negative working capital emerges. Such a
situation occurs when a firm is nearing a crisis of some magnitude.

4. Reserve Working Capital:

It refers to the short term financial arrangement made by the business units to meet
uncertainties. Business firms are always exposed to risks, which may be controllable or
uncontrollable. In the event of happenings of such events, reserve working capital strengthens
the capacity of the company to face the challengers.

5. Permanent Working Capital

The need for current assets is associated with the operation cycle. The magnitude of
investments in current assets however may not always be the same. The need for investments in
current assets may increase or decrease over a period of time according to the level of
productions. Nevertheless, there is always a certain minimum level of operations. This is the
irreducible minimum amount necessary for maintaining the circulation of the currents.

It means the minimum amount of investment in all current assets which is regarded at all
times to carry on minimum level of business activities. The operating cycle is a continuous
process and therefore, the need for current assets.

6. Temporary Working Capital

Depending upon the changes in the production and sales, the need of working capital,
over and above the permanent working capital, will fluctuate. The need of working capital may
also vary on account of seasonal changes or abnormal or unanticipated conditions, any special
advertising campaigns organized for increasing sales or other promotional activities may have to
be finished by additional working capital. The extra working capital need to support the
changing business activities is called fluctuating working capital.

This is also called the fluctuating or variable working capital. The amount of temporary
working capital keeps on changing depending upon the changes in production and sales. For
example extra inventory of finished goods will have to be maintained to support the peak periods
of sale and investment in receivable may also increase during such period.

On the other hand investment in raw materials, work-in-progress and finished goods will
decrease. If the market is black, the extra working capital required to support the changing
production and sales activities is known as temporary working capital.
The figure above shows that the permanent level is fairly constant while temporary
working capital is fluctuating sometimes increasing and sometimes decreasing in accordance
with seasonable demands. In the case of an expanding firm the permanent working capital line
may not be horizontal this is because the demand for permanent current assets might be
increasing or decreasing to support arising level of activity.

Both finds working capital are necessary to facilitate the sales process through the
operation cycle. Temporary working capital is created to meet liquidity requirements that are
purely transient nature.

1.1.8 DETERMINANTS OF WORKING CAPITAL

A large number of number of factors influence working capital needs of a firm. The
basic objectives of working capital management are to manage the firm‟s current assets and
current assets and current liabilities in such a way that a satisfactory level of working capital is
maintained.
 Nature Of Business:

The composition of current assets is a function of the size of a business and industry to
which it belongs. Small companies have smaller proportion of cash, receivables and inventory
than large corporations. This difference becomes more marked i.e., large corporations. A public
utility concern, for example, mostly employees fixed assets in its operations.
 Size Of Business:
The size of business is also an important impact on its working capital needs. Size may
be, measured in terms of scale of operations. A firm with large scale of operation will need more
working capital than a small firm.
  Length Of The Manufacturing Process:

Larger the manufacturing process, the higher will be the requirement of working capital
and vise versa. This is because of the fact that highly capital-intensive industries require a large
amount of working capital to run their sophisticated and long production process. On the same
principle of trading concern requires a much lower working capital than a manufacturing
concern.
 Production policy:

The production policies by the management have a significant effect on the requirement
on working capital of the business. The production schedule has a great influence on the level of
inventories. The decision automation etc., will also have an effect on the working capital
requirements.
 Volume of sales:

This is the most important factor effecting the size and components of working capital. A
firm maintains current assets because they are needed to support the operational activities which
resulting sales. The volume of sales and size of the working capital are directly related to each
other. As the volume of sales increases there is an increase in the investment of working capital.
 Terms of purchases and sales:

A Firm, which allows liberal credit to its customers, may enjoy higher sales but will need
more working capital as compared as compared to a firm enforcing strict credit terms. The
working capital requirements are also effected by the credit facilities enjoyed by the firm.
 Business cycle:

Business expands during the period of prosperity and declines during the period of
depression; consequently, more working capital is required during the period of prosperity and
less during the period of depression.
  Growth and expansion:

If a business firm has ambitious plan for expansion, it requires more working capital, to
fulfill such requirements. Growth and expansion in business is more essential to exploit the
available business opportunity and to increase the existing market share.
 Fluctuations in the supply of raw materials:

Certain companies have to obtain and maintain large reserve of raw materials due to their
irregular sales and intermittent supply. This is particularly true in case of companies requiring
special kind of raw materials available only from one or two sources. In such a case a large
quantity of raw materials is to be kept in store to avoidan possibility of the production process
coming to a dead halt. Thus, the working capital requirements in case of such industries would
be large.
 Price level changes:

The increasing shifts in price levels make the functions of financial managers difficult.
He should anticipate the effect of price level changes on working capital requirements of the
firm. Generally, rising price levels will require a firm to maintain higher amounts of working
capital. The same levels of current assets will need increased investment when prices are
increasing.
 Operating efficiency:

The operating efficiency of the firm relates to the optimum utilization of resources at a
minimum cost. The firm will be effectively contributing to its working capital if it‟s efficient in
controlling the operating costs. The use of working capital is improved and pace of cash cycle is
accelerated with operating efficiency.
 Profit margin:

Firms differ in their capacity to generate profit from business operations. Some firms enjoy a
dominant position, due to quality product or good marketing management or monopoly power in
the market and earn a high profit margin. Some other firms may have to operate in an
environment of intense competition and may earn low margin of profits.
  Profit appropriations:

Even if the net profits are earned in cash at the end of the period, whole of it is not
available for working capital purposes. The contribution towards working capital would be
effected by the way in which profits are appropriated. The availability of cash generated from
operations thus depends upon taxation, dividend and retention policy and depreciation policy.
 Credit Policy:

A, company which follows a liberal credit policy to its customers, may have higher
sales but will need higher working capital as compared to a company which has an efficient debt
collection machinery and observing strict terms. A company enjoying liberal credit facilities
from its suppliers will need lower amount of working capital as compared to a company, which
does not enjoy such credit facilities.

1.1.9 IMPORTANCE OF WORKING CAPITAL

The level of current assets changes constantly and regularly depending upon the level of
actual and forecasted sales. This requires that the decisions to bring the levels of current assets
should assets should be made at the earliest opportunity and as frequency as required.

The changing levels current assets may also require review of financing pattern. How
much working capital needs to be financed by different sources of financing must be periodically
reviewed. In efficient working capital management may result in loss of sales and consequently
decline in the profits of the firm. In efficient working capital management may also leads to
meets its liabilities and commitment.

Currents assets usually represent a substantial portion of the total assets of the firm.
Resulting in the investment of a larger chunk of funds of current assets. The targets sales level
can be achieved only it supported by adequate working capital. The increase in sales level
requires increase in working capital and thus the financial manager must be able to respond
quickly in providing and arranging working capital.
1.1.10 COMPONENTS OF WORKING CAPITAL

The main components of working capital are cash, marketable securities, accounts
receivable, trade credits and loans from bank, etc.

a) Cash

Cash is one of the most liquid and important components of working capital. It is
necessary for a business firm to maintain a certain amount of cash in hand or at bank always,
even if the other current assets are at a figure. Cash at bank balance have three important
functions namely transaction functions, precautionary functions and speculative functions. The
transaction function requires a firm to hold cash to conduct its business in the ordinary course.
The firm‟s cash primarily to make payment for purchase, wages operating expenses, taxes,
dividends, etc., the precautionary functions is the need to hold cash to meet any contingencies in
future. It provides a cushion or buffer to withstand some unexpected emergency.

The speculative functions relates to the holding of cash for investing in profit making
opportunities as and when they rise. Often some profitable opportunities come and if they are not
immediately exploited it may not be possible to take advantage of them subsequently. It may be
necessary therefore to maintain a certain amount of cash balance to enable the firm to exploit
opportunities.

b) Inventory

Every enterprise needs inventory for smooth running of its activities. It serves as link
between production and distribution processes. The investment in most of the undertaking
inventory includes the following things.

c) Raw Materials

Raw materials form a major inquired will put to the organization. The quantity of raw
materials required will be determined by the rate of consumption and the time required for
replenishing the suppliers.
d) Work In Progress

The Work in progress is the stage of stock, which is in between raw materials and
finished goods. The raw materials enter the manufacture but they are yet to attain a final shape of
finished goods. The quantum of work in progress depends upon the time in the manufacturing
process.

e) Finished Goods

Finished goods are those completely manufactured products, which are ready for sales
the stock of finished goods will be more when production is undertaken in general without
waiting for specific orders.

f) Book Debt/ Receivables

Receivable constitute a significant portion of current assets of a firm. Receivables

represent amounts owed to the firm as a result of sale of goods or services in the ordinary course
of business. These are claims of the firm against its customers and from part of its current assets.
Receivable are also known as accounts, receivable, customer receivable or book debts.

The period of credit and extent of receivable depends upon the credit policy followed by
the firm. The purpose of maintaining or investing in receivables is to meet competition and to
increase the sales and profits. The concern incurs the following cost on maintaining receivables,
cost of finishing receivables, cost of collection and bad debts.

g) Marketable Securities

A firm has to maintain a reasonable balance of cash. This is necessary because there is not
perfect balancing of inflows and outflows of cash. Sometimes more cash is received than
required for quick payment instead of keeping the surplus cash as idle, the firm tries to invest it
in marketable securities. It will bring some income to the business. The cash surplus will be
available during slack seasons and will be required when demands picks up again. The
investment of cash in securities needs a prudent and caution approach.
1.1.11 SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT

The current assets of a typical manufacturing firm account for over half of its total assets. For
a distribution company, they account for even more. Excessive levels of current assets can easily
result in a firm realizing a substandard return on investment. However, firms with too few
current assets may incur shortage and difficulties in maintaining smooth operations.

For small companies, current liabilities are the principal source of external financing. These do
not have access to the longer term capital markets capital markets, other than to acquire a
mortgage on a building. The fast growing but larger company also makes use of current liability
financing. For these reasons, the financial manager and staff devote a considerable portion of
their time to working capital matters. The management of cash, marketable securities, accounts
receivable, accounts payable, accruals, and other means of short-term financing is the direct
responsibility of the financial manager; only the management of inventories is not. Moreover,
these management responsibilities require continuous day-to-day supervision. Unlike dividend
and capital structure decisions, you cannot study the issue, reach a decision, and set the matter
aside for many months to come. Thus, working capital management is important, if for no other
reason than the proportion of the financial managerial time that must be devoted to it. More
fundamental, however, is the effect that working capital decisions have on the company risk,
return, and share price.

Profitability and Risk:

Underlying sound working capital management lie two fundamental decision issues for the firm.
They are the determination of,

1. The optimal level of investment in current assets.

2. The appropriate mix of short-term and long-term financing used to support this investment in
current assets.
In turn, these decisions are influenced by the trade-off that must be made between profitability
and risk. Lowering the level of investment in current assets, while still being able to support
sales, would lead to an increase in the form’s return on the total assets. To the extent that the
explicit costs of short-term financing are less than those of intermediate and the long-term
financing, the greater the proportional of short-term debt to total debt, the higher is the
profitability of the firm.

Although short-term interest rates sometimes exceed long term rates, generally they are less.
Even when short-term rates are higher, the situation is likely to be only temporary. Over an
extended period of time, we would expect to pay more in interest cost with long-term debt than
we would with short-term borrowings, which are continually rolled over (refinanced) at maturity.
Moreover, the use of short-term debt as opposed to longer-term debt is likely to result in higher
profits because debt will be paid off during periods when it is not needed.
 INTRODUCTION

1.2 INDUSTRY PROFILE

LEATHER INDUSTRY

Leather is one of the most widely traded commodities globally. The growth in demand for
leather is driven by the fashion industry, especially footwear. A part from this, furniture and
interior design industries, as well as the automotive industry also demand leather. The leather
industry has a place of prominence in the Indian economy due to substantial export earnings and
growth.

The Indian leather industry accounts for around 12.9 per cent of the world‟s leather production of
hides/skins. The country ranks second in terms of footwear and leather garments production in
the world.

Export highlights:

India‟s leather industry has grown drastically, transforming from a mere raw material supplier to
a value-added product exporter.

EVOLUTION AND GROWTH OF LEATHER INDUSTRY

The manufacture of leather is one of the oldest technological professions. Even before the
beginning of recorded time, man has worked with hides and skins to make the earliest form of
clothing. The leather making of primitive man was a race between his efforts and the destructive
forces of nature. The tanner quickly became a specialist and tanning skills were passed from
father to son and on these basis family fortunes and eventually, industrial empires were built

The concept of tanning and use of leather was prevalent from time immemorial. Between 5000
and 3000 B.C. the Sumerians of Southern Mesopotamia used leather to make women‟s dresses
and other items. Ancient Assyrians used leather to make wineskins which could be inflated to
make floating devices for rafts. The Phoenicians made water pipes from leather. The Romans
used leather for a wide variety of purposes and they became masters in the tanning process.
During the middle ages, leather tanners gathered together and formed guilds, because the tanning
process is so odoriferous that no one wanted them around.
The „Cordovan‟ leather, which is primarily used in shoe making, comes from horse hide, was
first produced by the Moors when they ruled in Spain during the 8th century A.D. The history of
leather manufacture in India can be traced back to ancient times as is evident from references to
it in Vedic literature and reports from Marco Polo. The leather making activities were mainly in
the hands of the village chamars and were sufficient to meet the local needs. International export
started only during the 1880s. The history gives an account of the origin of tanning process. The
tannin is a chemical that occurs in a wide variety of plants and trees, most notably, the oak. It is
widely believed that man happened upon the sealing qualities of tannin by the most precise of
scientific methods. In other words, it was discovered purely by accident. Early hide users were
trying to dry the hides by smoking them. The tannins in the bark and leaves and leaves that were
used to fuel the fire of the smoking process were released into the hides, thus helping to make
said hides a pliable material. The primitive method of preparing hides was first they soaked it
then pounded. The skin was then placed over a plank and carefully scraped. After the fat and
meat were removed, the hide was coated with urine or wood ash to aid in hair removal. Dung
from carnivores, such as dogs‟ was spread over the hide for bating. After bating, finishing was
done. For finishing hide was washed and hung over a pole that rested over clay lined pit. The pit
was filled with a mixture of water and crushed oak bark. The alternative method involved was
using a brain soup to coat the hide with. The brain soup is prepared from the brain of the animal
that provided the hide.

There were various emissions being generated in the leather tanning and finishing industry.VOC
emissions may occur during finishing processes. Ammonia emissions may occur during some of
the wet processing steps. Emissions of sulphide may occur during liming/unhairing and
subsequent processes. Also alkaline sulfides in tannery waste water can be converted to
hydrogen sulfide if the PHis less than 8.0, resulting in release of this gas. Chromium emissions
may occur from chromate reduction, handling of basic chromic sulfate powder and from the
buffing process. 46 The twentieth century marked a new period in the trade history of the Indian
leather industry. During 1900-1914, the export scene was dominated by Calcutta and Madras
with the former exporting raw goods and the latter tanned ones. In 1912-13, the total export of
hides/skins amounted to Rs. 8 crores as against Rs. 4 crores from Madras. This was because 17
of the 22 organised tanneries were in Madras and the rest remained scattered in Bengal, Bihar,
Orissa and Bombay. The outbreak of World War II gave an impetus to the development of
leather and leather goods industry in India. While in 1913-14 only 25 large units, employing
2,753 workers, were established, by 1941, the number of units had increased to 114 and the
workers to 26, 056. Before 1947, though the British had shown considerable interest in leather
manufacturing in India and had even established some chrome tanning units in Bengal, India
mainly exported raw hides and skins. After independence, planned efforts were made by the
government of India to promote and develop export trade by the adoption of the Export Policy
Resolution in 1970 and implementing the recommendations of the Seetharamiah Committee.

The first and second migrations in the global tanning and finishing industry have had a definite
impact on the Indian leather industry. The last two decades have marked the emergence of the
leather products industry as one of the top five foreign exchange contributors to our country. The
industry had undergone total metamorphosis, emerging as one of the significant competitors in
the global market for leather and leather products. The image of the country as a supplier of raw
hides and skins and tanned leather has been left far behind and our products, such as leather
footwear, leather apparels and hand bags, have found wide acceptance even in quality conscious
markets such as Germany, USA, Japan and France. This has been possible largely due to the far
sighted policies of the Government of India and the initiatives from the industry.

The industry thus, came to be reserved for the small scale sector. The industry remained
virtually confined to the cottage sector due to the excise duty regulations which required an
industrial unit using more than 2 HP electric power, or employing more than 50 persons, to
comply with the excise regulations. At the beginning of the 1970s, the bulk of the hides and
skins produced was exported as 51 raw material and whatever production of leather and leather
products took place in the country was predominantly carried out in cottage level units. The
industry attracted attention in the early 1970s when there was foreign exchange crisis caused by
the oil price hike. Among the few industries identified as having export potential, leather was
one. The main factors that do have an impact on the demand pattern for footwear and leather
goods are population, disposable personal income levels, climatic conditions, price levels,
general economic condition, availability of attractive and competitive substitutes, religious
considerations-in that order.

Total leather and leather good exports from India stood at US$ 5.92 billion in FY 2015-16.
During 2015–16, the major markets for Indian leather products were US (14.25 per cent),

UK (12.24 per cent), Germany (11.5 per cent), Italy (6.9 per cent), Spain (5.6 per cent), Hong
Kong (5.4 per cent), France (5.3 per cent), UAE (4.5 per cent), Netherlands (3.2 per cent), China
(2.8 per cent) and Australia and Belgium (1.45 per cent each).

At 47.0 per cent, footwear accounted for the lion‟s share of leather exports in FY 2015-16,
followed by leather goods and accessories with 23.0 per cent share, finished leather with 18.0 per
cent share, leather garments with 9.0 per cent share, and saddlery & harness with 3.0 per cent
share.

Per capita footwear consumption in India is expected to increase up to four pairs, while domestic
footwear consumption is expected to reach up to five billion pairs by 2020.
 GLOBAL LEATHER INDUSTRY

In recent years, the demand for leather goods market has grown. Industry revenue is forecast
to reach $91.2 billion by 2018, with a CAGR of 3.4%, over the next five years. The competitive
rivalry seems to be high due to the large number of players competing with each other to gain
market share. Consumer demand has been shifting toward the new design and innovative leather
products with changing fashion trend and lifestyle.

Lucintel gives an overview of the key drivers of the industry. Upgraded designs, global
economic growth, and the purchasing power of consumers are important key drivers for the
leather goods industry. Emerging economies and availability of required resources enhanced the
manufacturing facilities of the existing players.

A total of 45 figures / charts and 12 tables are provided in this report to help in your business
decisions. Sample figures with some insights are shown below. To learn the scope of, benefits,
companies researched and other details of the leather goods market report, download the report
brochure.

This study provides an overview of the global leather goods market, tracking two market
segments of that industry in four geographic regions. The report studies manufacturers of
luggage and leather accessories product such as briefcases, suitcases, business cases, travel
bags, leather jackets, handbags, wallets, purses, and belts. The study provides a five-year annual
trend analysis that highlights market size, profit and cost structure for North America, Europe,
APAC, and ROW report studies the prevailing challenges facing the industry. The rising input
cost of raw materials such as leather and plastic have severely impaired profit margins, which in
turn have reduced the industry‟s gross profit margin. High research and development activities
in developing countries geared toward market expansion, as well as growth and capital
expenditures for business expansion increased the overall debt present in the industry.

This study is intended to provide industry leaders with a competitive benchmarking of the
global leather goods industry. The study provides up-to-date information on the market share,
profit margins, capabilities, and strategies of the leaders.

This comprehensive guide from Lucintel provides readers with valuable information and the
tools needed to successfully drive critical business decisions with a thorough understanding of
the market‟s potential. This report will save Lucintel clients hundreds of hours in personal
research time on a global market and it offers significant benefits in expanding business
opportunities throughout the global leather goods maket analysis. In a fast-paced ever-changing
world, business leaders need every advantage available to them in a timely manner to drive
change in the market and to stay ahead of their competition. This report provides business
leaders with a keen advantage in this regard by making them aware of emerging trends and
demand requirements on an annual basis.

Some of the features of Growth Opportunities in the Global Leather Goods Market report
are:

Leather goods market size estimates in terms of (US $) value by regions

Global leather goods market analysis annual trend (2007-2012) and forecast (2013-2018)
Porter‟s Five Force analysis
New product launch and merger and acquisition activity in global leather goods market
analysis
Quarterly demand trend (Q1 2011-Q4 2012) and forecast analysis (Q1 2013-Q4 2014) for
global leather goods market analysis
Gross and net profit trends in the global leather goods market analysis
Cost structure trend in the global as well as regional leather goods analysis
More than 43 valuable figures/charts and 10 tables are provided in this report
 Report on Global Leather Goods Industry

LONDON--(BUSINESS WIRE)--Technavio‟s latest consumer and retail industry report

covers the present scenario and growth prospects of the global leather goods industry 2015-
2019.

Global leather goods industry estimated to reach close to USD 247 billion by 2019.
Tweet this
In this report, Technavio‟s retail goods and services research experts announce their key
market highlights for the global synthetic latex polymers market. Their findings include:

Global leather goods industry estimated to reach close to USD 247 billion by 2019

According to the report, the global leather goods industry was valued at over USD 200 billion in
2014 and is estimated to reach close to USD 247 billion by 2019. The growing demand for
leather goods is likely to have a positive growth trend during the forecast period. With several
product launches by both local and large players, manufacturers are inducing customers to buy
the products.

With the improving economies and rising purchasing power among individuals in developing
countries, customers are buying more luxury leather goods in countries like India and China.
The trend of purchasing products online is also pushing manufacturers to change their retail
strategy. For instance, Fendi, one of LVMH‟s brands, built its own e-commerce site in 2015.

“One of the major factors driving the growth of the global leather goods industry is the growing
demand for eco-friendly or organic leather products as conventional leather tanning has a
disastrous effect on human health and leads to ecological imbalance,” says Brijesh Kumar
Choubey, a lead retail goods and services analyst at Technavio.

The report further states that organic leather is raised and organically tanned. The USDA
National Organic Program ensures animals are raised organically and leather is tanned in a
certified organic tannery. Eco leather is tanned organically and the tanning process includes
using plant tannins, vegetable tannins, and smoke for the process. There are some manufacturers
like Valentino and the Gucci Group which have started using eco-friendly and organic leather
for their products.

Footwear segment: largest product segment for leather goods industry with 59% market
share

The global leather goods industry is segmented on the basis of product, including footwear,
luggage, and bags, wallets, and purses. As of 2014, the footwear segment dominated the market
with 59% market share. The women‟s autumn-winter collection in 2014 featured nods and other
Hermès designs.

“By holding close to 24% of the revenue share, the bags, wallets, and purses segment comprise
the second largest segment in the market. With the demand for leather products spread across
segments, this segment is expected to see a positive trend during the forecast period. From local
labels to top brands, several manufacturers launched products in 2014,” says Brijesh.

The luggage segment in the global leather products comprises close to 17% of the market share.
The tourism and travel industry acts a catalyst in driving the demand for the overall market. In
2014, Prada‟s sales revenue of leather goods had decreased by 1.4%, mainly due to decrease in
tourist footfall in the main shopping destinations of Europe and Asia.

The Americas stands as the largest market for leather goods

The global leather goods industry is well diversified between the Americas, APAC, Europe, and
MEA. In 2014, the Americas was the largest region for leather goods with a revenue share of
more than 38%. Product innovation and advances in technology are the major growth drivers of
this market. The US market stands as the largest market followed by Canada and Mexico. Some
of the top players in this region include J.C. Penney, Ebags, Sears Holding Corporation, etc.

“In the Latin American market, Brazil stands as one of the key players in the region and has
become the major target market for leather and fashion goods worldwide. Brazil is also one of
the major leather producers and exporters of leather worldwide,” says Brijesh.
Browse Related Reports:

Global Personal Luxury Goods Market 2015-2019

Leather Chemicals Market in Europe 2015-2019
Personal Luxury Goods Market in the US 2015-2019
Purchase these three reports for the price of one by becoming a Technavio subscriber.
Subscribing to Technavio‟s reports allows you to download any three reports per month for the
price of one. Contact enquiry@technavio.com with your requirements and a link to our subscription
platform.
 INDIAN LEATHER INDUSTRY

The leather industry occupies a place of prominence in the Indian economy in view of its
massive potential for employment, growth and exports. There has been an increasing emphasis
on its planned development, aimed at optimum utilisation of available raw materials for
maximising the returns, particularly from exports. The exports of leather and leather products
gained momentum during the past two decades. There has been a phenomenal growth in exports
from Rs.320 million in the year 1965-66 to Rs.69558 million in 1996-97. Indian leather industry
today has attained well merited recognition in international markets besides occupying a
prominent place among the top seven foreign exchange earners of the country.

The leather industry has undergone a dramatic transformation from a mere exporter of raw
materials in the sixties to that of value added finished products in the nineties. Policy initiatives
taken by the Government of India since 1973 have been instrumental to such a transformation.
In the wake of globalisation of Indian economy supported with liberalised economic and trade
policies since 1991, the industry is poised for further growth to achieve greater share in the
global trade.

Apart from a significant foreign exchange earner, leather industry has tremendous potential for
employment generation. Direct and indirect employment of the industry is around 2 million.
The skilled and semi-skilled workers constitute nearly 50% of the total work force. The
estimated employment in different sectors of leather industry is as follows:

Sector Total Employment

Flaying, curing & Carcass Recovery 8,00,000

Tanning & Finishing 1,25,000

Full Shoe 1,75,000

Shoe Uppers 75,000
Chappals & Sandals 4,50,000
Leather Goods & Garments 1,50,000

Structure of the industry

The leather industry is spread in different segments, namely, tanning & finishing, footwear &
footwear components, leather garments, leather goods including saddlery & harness, etc. The
estimated production capacity in different segments is as under

Product Capacity

Leather

Hides 64 million pieces

Skins 166 million pieces

Footwear & Footwear Components
a) Shoes 100 million pairs
b) Leather shoe uppers 78 million pairs
c) Non-leather shoes/chappals etc 125 million pairs

Leather Garments 6 million pieces

Leather Products 70 million pieces

Industrial Gloves 40 million pairs
Saddlery 6000 pieces

The major production centres for leather and leather products are located at Chennai, Ambur,
Ranipet, Vaniyambadi, Trichi, Dindigul in Tamil Nadu, Calcutta in West Bengal, Kanpur in
Uttar Pradesh, Jalandhar in Punjab, Bangalore in Karnataka, Delhi and Hyderabad in Andhra
Pradesh.
Raw material supplies

There exists a large raw material base. This is on account of population of 194 million cattle, 70
million buffaloes, 95 million goats. According to the latest census, India ranks first among the
major livestock holding countries in the world. In respect of sheep with 48 million sheeps, it
claims the sixth position. These four species provide the basic raw material for the leather
industry.
The annual availability of 166 million pieces of hides and skins is the main strength of the
industry. This is expected to go up to 218 million pieces by the end of year 2000. Some of the
goat/calf/sheep skins available in India are regarded as speciality products commanding a good
market. Abundance of traditional skills in training, finishing and manufacturing downstream
products and relatively low wage rates are the two other factors of comparative advantage for
India.

Tanning and finishing capacity

With tanning and finishing capacity for processing 1192 million pieces of hides and skins per
annum spread over different parts of the country, most of which is organised along modern
lives, the capability of India to sustain a much larger industry with its raw material resource is
evident. In order to augment the domestic raw material availability, the Government of India
has allowed duty free import of hides and skins from anywhere in the world. It is an attraction
for any foreign manufacturer who intends to shift his production base from a high cost location
to low cost base.

Export Potential
The leather industry, one of the major foreign exchange earners of the country recorded
significant growth since the beginning of the decade. Today the share of the value added
finished products in the total exports from leather sector are 80% as against 20% in 1970s.
 LEATHER INDUSTRY IN TAMIL NADU

Leather industry in Tamil Nadu is considered to be very ancient and some say it is of more than
two centuries old. The art of tanning of hides and skins is prevalent here since time immemorial.
Once it was done in primitive tanning methods and passed on with some improvements from
generation to generation.

After Independence, the leather industry has made a rapid technical and technological
advancement, thanks to the efforts of tanners, technical know-how of the Central Leather
Research Institute (CLRI) and well chalked out policies of the governments in the state and at the
centre based on the recommendations of the Seetharamiah Committee report. Many people
established modern tanneries and started doing high quality finished leather meant for shoes,
garments, goods, upholstery etc. Many modern units also came up for shoes, garments and
goods. All these show that a tremendous industrial development has taken place within a period
of about 30 years. No doubt, our country is very much on the forward march....

AISHTMA:

The All India Skin and Hide Tanners and Merchants Association is a 92 years old apex body and
various district and regional associations are affiliated to it. Both the central and state
governments have recognised it and consult on all policy matters such as labour, taxation etc. It
is also in the service of tanners in importing and supplying tanning materials like wattle extract
to them. It is also associated with many national and international trade and industry
organisations. It celebrated its platinum jubilee in a grand manner in the year 1994. The present
President and Hony. Secretary are Mr. M. Rafeeque Ahmed and Mr. Mohan M. Sreenivas
respectively.

TAMIL NADU IN THE FOREFRONT

According to Aishtma, Tamil Nadu is in the forefront in leather with an annual production of
more than 1.2 billion sq. ft. of finished leather. It is about 60% share in total finished leather
production of our country and 45% share in total export from India. There are about 750
tanneries in Tamil Nadu and the raw material processed per day is 500-1000 tons and annual
turnover more than Rs.10,000 crore, number of operational CETPs is 16 catering to 630
tanneries, number of ETPs is 94 and there are more than 56 RO plants in Tamil Nadu. No
tannery operates without access to any Effluent Treatment Plant and 100% connectivity to
pollution control devices is a speciality of Tamil Nadu.

There are 497 leather products units in Tamil Nadu producing about 59 million pairs of full
shoes, 27 million pairs of shoe uppers, 7.1 million pieces of leather garments and 29.5 million
pieces of leather goods. The quality of various leathers being produced here is of high standard
and comparable with that of any advanced country. Consequently the state of Tamil Nadu once
popular for E.I. Tanned hides and skins throughout the world particularly in countries like the
U.S.A., the U.K., Italy, West Germany, France, Japan etc. is now popular for leather and leather
products in these and many other countries. While Chennai, Ambur, Vaniyambadi, Pernambut,
Ranipet, Trichy, Erode and Dindigul are the main centres for leather, Chennai, Ambur and
Ranipet are the major hub for leather products such as leather shoes, garments and goods. Our
country has earned laurels as a good and reliable supplier of leather and leather products in the
world market. Interested persons can contact the following association which is, as said earlier,
an apex body of different district and regional associations:

The All India Skin and Hide Tanners and Merchants Association,
“Leather Centre”,
43/53, Raja Muthiah Road, Periamet, Chennai – 600 003 (India)

Telephone: 0091-44-25610636, 25615247 Fax: 0091-44-25615292

E-mail: aishtma@vsnl.com and assn@aishtma.com
Website: http://www.aishtma.com
DINDIGUL, THRICY AND ERODE
Dindigul is still a well known centre as before for E.I. tanned goat and sheep skins as most of the
tanners here are addicted to doing only this popular item due to various reasons. There are very
few tanners in the chrome tanning and no tanner seems to be producing finished leather here. A
reliable and traditional tanner who has inherited this trade from his forefathers told me that the
present situation is not conducive for switch over to anything like full chrome, semi chrome or
finished leather. The association also does not permit it as pollution is involved. Other problems
such as labour and water are also there. The progressive policy of the government has not
changed this tanning centre much.

While the leather industry has suffered, textile industry has made a good development here in
Dindigul. It is said that there are more than 250 spinning mills here.

Other popular centres are Trichy and Erode. There are many tanneries in Trichy where mostly
high standard E.I. tanned goat skins are produced and in the Erode tanneries wet blue cow hides
are the main items done. Only very few tanners do some other leather items.

PERNAMBUT
This small town has about 35 tanneries where mostly items like buffalo hides and soul leathers
are made for local supplies. Some are also exporting these items. Some shoe factories have also
been established here. They are mostly doing job works. Much development is not seen here as
perhaps there is nobody to guide them for adopting modern approaches for finance and industrial
developments.

CHENNAI
There are quite a large number of tanneries and leather goods, shoe and garment factories in
different parts of Chennai mainly at Pallavaram and Madhavaram where different items of
leather and leather products are made and supplied to national and international customers. There
are so many highly modern units where high quality leather and leather products are made and
exported.
AMBUR AND VANIYAMBADI
In Ambur, a well known centre for leather, there are quite a large number of tanneries where E.I.
tanned goat and sheep skins, S/C and F/C finished leather etc. are produced. Some of the
tanneries are very big and modern with all necessary machinery and infrastructure where high
class finished leathers meant for shoes, garments and goods are produced and exported.
Importers in different countries have close links with Ambur based tanners and exporters and do
big contracts as goat and cow leathers are available in plenty here with international standards.
There are very few sheep tanners here. This town has also made a name for its well equipped and
well infrastructured modern shoe factories where high standard world class foot wears are made
and exported to many countries including the U.S.A, U.K, Italy, Germany, Portugal, Switzerland
and Spain.

At the time of writing this two industrialists come to my mind who were instrumental for the
industrial development here. If I remember correct while the late Anaikar Abdul Shukoor sahib
started doing finished leather silently before the government introduced its progressive policy,
the late T. Abdul Wahid sahib was also a pioneer in following the government policy and asking
tanners to do it for their better prospects in the industrial arena. The latter had to face even
criticism for his well intentioned actions. But now the leather industry realises their importance
and their foresight.

Another centre famous for the leather industry is Vaniyambadi. Here again there are quite a large
number of tanneries where items such as E.I. tanned goat and sheep skins, S/C and F/C finished
leathers are made, locally supplied and exported. There are also innumerable job tanners here. It
is the best place for dealing in sheep items. We can say that it is the leather tanning centre with
the largest number of tanneries in Tamil Nadu. No other centre has as many tanneries as
Vaniyambadi does.

Vaniyambadi is just about 30 minutes drive from Ambur. While there are more tanneries in
Vaniyambadi, there are more shoe units in Ambur which are supplying to the best shoe
companies abroad. These two neighbouring centres are playing an important role in the
development of the leather industry in the country.
RANIPET
Ranipet has a large concentration of tanneries like Ambur, Vaniyambadi and Chennai processing
hides and skins from raw to finish. Various descriptions of leather such as lining, upper and
suede leathers are made here for supply to national and international customers. There are also
some job tanneries here. Besides these, there are many highly sophisticated and modern units
where world class shoes, garments and leather goods are made and exported. SIPCOT industrial
complex is also here. It is yet another well known place for leather and leather products in the
world market.
 LEATHER MAKING

PROCESS FOR LEATHER INDUSTRY

FINISHED LEATHER PRODUCTS
 1.4 INDUSTRY PROFILE

We are part of the A.V. Thomas Group which has interests in a wide range of activities Tea,
Coffee, Rubber, Cardamom plantations, manufacture and export of leather Goods and cotton
Apparels, Latex examination Gloves, Solvent Extraction of soybean, marketing of pesticides,
insecticides and industrial Chemicals, manufacture of oleoresin and Natural flavours and plant
Bio-Technology. The group has been in the Business since 1925. The company, A.V. Thomas
leather and Allied products private ltd, was established in 1977 and began its operation making
small leather goods for Australian market from a modest beginning sales worth approximately
half a million rupees in that year.

The Company had taken leased it‟s the first premises at no.18 venkatachala mudali st., choolai,
madras in the year 1977 and commences its business on 21.7.1977.
OUR INDUSTRY PRODUCTS:
OUR STORES:

Corporate/Administrative office:

1 12 Race Course Road, Guindy, Chennai- 600 032

Leather Goods Factories

1 plot No.12, Alwarthirunagar Annexe Valasaravakkam, Chennai- 600 087

2 No.12, Multi industrial area, Multi nagar main road, Gerugambakkam, Chennai 602 101
3 No 16/1, Chakrapani Road, Guindy, Chennai 600 032
4 No 189/99f, MKN Road, Alandur Chennai 600 016
st
5 B8 & 9, 1 Cross Road, TVK Industrial Estate, Guindy, Chennai 600 032
6 SDF, Phase 3, Block 1234, SEZ, MEPZ, Tambaram, Chennai 600 045
7 2/431, Kuntrathur Road, Kovur, Chennai 602 101
8 Survey No. 115/1A2, Kundrathur Road, Kovur, Chennai 602 101
9 103, Ranganathan Street, Guindy, Chennai 600 032
10 Survey No.643/2A, 77 Nandambakkam, Kundrathur- Sriperumpudur Road,
Kanchipuram(Dt)
11 Dhanalakshmi, 37, Sannathi street, Maduranthagam- 603 306
12 189-F, MKN Road, Alandur, Chennai- 600 016

Shoe Factories

13 12, Race course road, Guindy, Chennai 600 032

14 11, Race course road, Guindy, Chennai 600 032
15 50, Muthupalaniappa Nagar, nagalkeni,Chennai 600 044
16 4 A&B, P.P. Amman koil street, chrompet, Chennai 600 044
17 6, S P Developed industrial estate, Guindy, Chennai-600 032

Leather Processing Unit

18 Othivakkam village, Guduvancherri, Tamil Nadu

19 No.111, Ammorr Road, Ranipet- 632 402
20 26, Thiruneermalai Road, Chrompet, Chennai- 600 044
21 3P.P.P. Amman koil street, Chennai- 600 044

Man Power:

Total Number of employees are : 2050. This includes Staff 348.

 1.4 STATEMENT OF THE PROBLEM

Working capital management are simply the management of capital invented in current assets is
the focus of study. So topic is “A Study on working capital management at A.V.T PVT LTD”.

Working capital is the fund invested by a firm in current assets. Now in a cut throat competitive
era where each firm competes with each other to increase their production and sales, holding of
sufficient current assets have become mandatory as current assets include inventories and raw
materials which are required for smooth production runs. Holding of sufficient current assets
will ensure smooth and Un interrupted production but at the same time, it will consume a lot of
working capital. Here creeps the importance and need of efficient working capital management.
Working capital management aims at managing capital assets at optimum level, the level at
which it will aid smooth running of production and also it will involve investment of nominal
working capital in capital assets.

“
INDUSTRY EFFECT ON WORKING CAPITAL

Working capital management can be very different across industries as the needs and policies
vary heavily from industry to industry. For example Weinraub and Visscher (1998) study the
different strategies employed by companies to manage their working capital across different
industries. Their purpose is to find out if industries that tend to have aggressive investment
policies also follow aggressive financing strategies. They also study the stability of working
capital policies over time.

The result of Weinraub and Visscher (1998) show that different industries follow significantly
different strategies in their working capital management, and that these strategies remain stable
relative to each other over time. There is also a strong leaning towards that companies that
companies that are more aggressive in some areas are more conservative in others.

Another study, conducted by Filbeck and Krueger (2005) uses the annual reports of working
capital management by CFO magazine to analyze whether there are differences of managing
working capital across industries. They discover that there are significant differences between
industries working capital management across time. They also find that the same measures can
change significantly over time within the industry. Filbecks and Kruegers study probes that
working capital performance changes over time, depending mostly on macroeconomic factors
such as interest rates, rate of innovation and competition.

The main point studied in the article by Filbeck and Krueger, though is how the industry of the
company affects working capital. The authors point out that many scholarly articles and books
discuss working capital management and liquidity without taking into account the industry in
which the company operates in, which is , according to the authors, a very important different
working capital needs and how the different metrics of working capital differ from industry to
industry.

The study conducted by Hawawini, Viallet and Vora (1986) studies the investment needed in
working capital per industry. They use the working capital requirement as a measure for the
investment in working capital. They find significant industry differences in working capital
needs.

The authors also conduct a cluster study, where they study how different industries cluster
together in terms of working capital requirement in proportion to sales. They find that there are
11 distinct clusters for industries, which coincides greatly with the companies.
1.6 OBJECTIVES:
PRIMARY OBJECTIVES:

 To evaluate the working capital management of A.V. Thomas pvt ltd.

SECONDARY OBJECTIVES:

 To assess the short term solvency position A.V. Thomas pvt ltd.
 To analyze the efficiency of inventory management.
 To assess the efficiency receivable and payable management.
 To analyze the efficiency of operating performance.
 To offer suitable suggest in A.V. Thomas Pvt Ltd.

1.5 SCOPE OF THE STUDY

 The study of working capital management at A V Thomas pvt ltd. furnishes the
management idea about the performance of working capital of the company. The Study
analyses the liquidity position and efficiency of working capital Management with the
help of ratios. It also identifies the areas that need to improve by company and give
suggestion which could be used in future for enhancing in better utilization of resources.
 The period of analysis is confined to financial year 2013-2014, 2014-2015 and 2015-
2016.

1.7 LIMITATIONS:

 The studies restricted to a period of 3 years 2013-2014, 2014-2015 and 2015-2016.

 The studies fully based on Secondary data collection by published the Auditing in
financial statement of A.V. Thomas pvt ltd.

 Result arrive as applicable only for A.V. Thomas pvt ltd No generate can be made.
 CHAPTER: II

2.1 REVIEW OF LITERATURE

Natarajan Sundar in their study on working capital management& finance, economic

& political weekly (1980) is stated that the working capital is important at both, the national
and the corporate level. Control on working capital at the national level is exercised primarily
through credit controls. The Tandon Study Group has provided a comprehensive operational
framework for the same. In operational terms, efficient working capital consists of determining
the optimum level of working capital, financing it imaginatively and exercising control over it.
He concludes that at the corporate level investment in working capital is as important as
investment in fixed assets. And especially for a company which is not growing, survival will be
possible only so long as it can match increase in operational cost with improved operational
efficiency, one of the most important aspects of which is management of working capital.

Kaveri V. S. in their study on finance of working capital management & finance,

economic & political weekly (1985) has based his writing on the RBI‟ s studies on finances of
large public limited companies. This review of working capital finance refers to two points of
time i.e., the accounting years ending in 1979 and 1983 and is based on the data as given in the
Reserve Bank of India on studies of these companies for the respective dates. He observes that
the Indian industry has by and large failed to change its pattern of working capital financing in
keeping with the norms suggested by the Chore Committee. While the position of working
capital management showed some investment between 1975-79 and 1979-83, industries have not
succeeded in widening the base of long-term funds to the desired extent. The author concludes
with the observation that despite giving sufficient time to the industries to readjust the capital
structure so as to shift from the first method to the second method, progress achieved towards
this end fell short of what was desired under the second method of working capital finance. 95

Bhattacharyya Hrishikes in their study on A Techno financial approach economics

& political weekly (1987) tries to develop a comprehensive theory and tool of working capital
management from the system‟s point of view. According to this study, capital is often used to
refer to capital goods consisting of a great variety of things, namely, machines of various kinds,
plants, houses, tools, raw materials and goods-in-process. A finance manager of a firm looks for
these things on the assets side of the balance sheet. For capital he turns his attention to the other
side of the balance sheet and never commits a mistake. His purpose is to balance the two sides in
such a way that net worth of the firm increases without increasing the riskiness of the business.
This balancing is financing, i.e., financing the assets of the firm by generating streams of
liabilities continuously to match with the dynamism of the former. The study is an improvement
of the concept of Park and Gladson who were not able to capture the entire technofinancial
operating structure of a firm.

Rao K.V. and Rao Chinta in their study on Evauating efficiency of working capital
management (1991) observe the strong and weak points of conventional techniques of working
capital analysis. The result has been obviously mixed while some of the conventional techniques
which could comprehend the working capital behavior well; others failed in doing the job
properly. The authors have attempted to evaluate the efficiency of working capital management
with the help of conventional techniques i.e., ratio analysis. The article concludes prodding
future scholars to search for a comprehensive and decisive yardstick in evaluating the working
capital efficiency.

Hamlin Alan P. and Heath field David F. in their study on Competitive management
and working capital, managerial & decision economics (1991) opine that working capital is
necessary input to the production process and yet is ignored in most economic models of
production. The implications of modeling the time dimension of production, and hence, the
working capital requirements of firms are explored, with the particular stress placed on the
competitive advantage gained by firms that retained flexibility in the time structure of their
production. In this article they have attempted to explore only this most basic role of time in the
production process and so focus is on the implications of explicitly recognizing the need for
working capital.

Fazzari Steven M. and Petersen Bruce C. in their study on Working capital & fixed
investment (1993) throws light on new tests for finance constraints on investment by
emphasising the often neglected role of working capital as both a use and a source of funds. The
authors believe that working capital is also a source of liquidity that should be used to smooth
fixed investment relative to cash-flow shocks if firms face finance constraints. They have found
that working capital investment is “excessively sensitive” to cashflow fluctuations. Besides,
when working capital investment is included in a fixed-investment regression as a use or source
of funds, it has a negative coefficient. They conclude that controlling for the smoothing role of
working capital results in a much larger estimate of the long-run impact of finance constraints
than reported in other studies.

Hossain Saiyed Zabid and Akon Md. Habibur Rahman in their study on Financing
of working capital of BTMC (1997) emphasise the basic objective of working capital
management i.e., to arrange the needed working capital funds at the right time, at right cost and
from right source with a view to achieving a trade-off between liquidity and profitability. The
analysis reveals that BTMC had followed an aggressive working capital financing policy taking
the risk of liquidity. There was uninterrupted increasing trend in negative net working capital
throughout the period of the study which suggested that BTMC had exploited the entire short-
term sources available to it without considering the actual needs.

Ahmed Habib in their study on Responses in output to monetary shocks and the
interest rate (1998) points out that when the interest rate is included; money loses its predictive
power on output. The study explicates this finding by using a rational expectations model where
production decisions of firm required debt finance working capital. Working capital is an
important factor and its cost, the rate of interest, affects the supply of goods by firms. Monetary
policy shocks, thus, affect the interest rate and the supply side, and as a result price and output
produced by firms. The model indicates that this can cause the predictive power of monetary
shocks on output to diminish when the interest rate is used in 97 empirical analysis. The model
also alludes to the effects of monetary policy on the price level through the supply side (cost
push) factors.

Prof. Mallick Amit and Sur Debasish in their study on Working capital &
profitability (1998) attempt to make an empirical study of AFT Industries Ltd, a tea producing
company in Assam for assessing the impact of working capital on its profitability during the
period 1986-87 to 1995- 96. The author has explored the co-relation between ROI and several
ratios relating to working capital management. On the whole, this study of the corelation
between the selected ratios in the area of working capital management and profitability of the
company revealed both negative and positive effects. Moreover, the WCL of the company
recorded a fluctuating trend during the period under study.
 CHAPTER - III

3. RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem. It is the science
of studying how research is done scientifically for getting pertinent information on a specific
topic.

Research Design:

The study is descriptive in nature. It describes the short term solvency position, the efficiency
the inventory management, Receivables management, Payable management, and Operating
performance.

3.1SOURCES OF DATA

The study depends on Secondary Data only. The study is based on secondary data taken from
the annual report of AVT Leather & Allied product pvt ltd..
1) Profit and loss Account
2) Balance Sheet
Profit and loss account reveals the income and expenditure of the company. Balance sheet
reveals the financial position of the organization. Those two statements are prepared by the
highly qualified and experts with the help of available information or data.

3.2 PERIOD OF STUDY:

The present study deals with the data collected from the annual reports and other relevant
documents for the period commencing from 2013-2014, 2014-2015 and 2015-2016.
3.3 TOOLS USED FOR THE ANALYSIS
1. Ratio Analysis
Current ratio
Liquidity ratio
working capital turnover ratio
Asset turnover ratio
Debtor turnover ratio
Defensive interval ratio
Cash flow from operation

2. Operating Cycle Analysis

Inventory period
Accounts receivable period
Accounts payable period
Operating cycle
Cash cycle

3. Schedule of changing in working capital

Working capital for the year 2014-2015
Working capital for the year 2015-2016

4. Funds flow statement

 4.1.1 CURRENT RATIO
This ratio may be defined as relationship between current assets and current liabilities. And
it is known as working capital ratio is a measures of general liquidity and most widely
used to make analysis of short term financial positions.
Current Ratio = Current Assets/Current Liabilities

SL.NO YEAR CURRENT ASSETS CURRENT LIABILITIES RATIO

1 2013-2014 1770155687 1039961847 1.7

2 2014-2015 1813444851 1036979102 1.75

3 2015-2016 1580424848 730371928 2.16

RATIO
2.5
2.16

2
1.7 1.75

1.5

1 RATIO

0.5

0
2013-2014 2014-2015 2015-2016

Interpretation
The table shows that interpretation at the year of 2013-14 ratio is 1.7 and it is increased to
1.75 in 2014-15 and at last again it increased to 2.16 in 2015-16.
 LIQUID RATIO

. Liquid ratio also known as acid test ratio established a relationship between quick or liquid
liabilities. An asset is said to be liquid if it can be converted into cash within a short period
without loss of value. The other liquid assets or bill receivable, such debtors, marketable
securities and temporary investments

Quick Ratio = Quick Assets / Current Liabilities

CURRENT
SL.NO YEAR ASSETS CURRENT LIABILITIES RATIO
1 2013-2014 378655657 1039961847 0.36
2 2014-2015 562738969 1036979102 0.54
3 2015-2016 747849531 730371928 1.02

RATIO
1.2
1.02
1

0.8

0.6 0.54
RATIO
0.36
0.4

0.2

0
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 ratio is 0.36 and it is increased to
0.54 in 2014-2015 and at last again increased to 1.02 in 2015-2016.
 WORKING CAPITAL TURNOVER RATIO

The Working capital turnover ratio is also referred to as net sales to working capital. It
indicates as company‟s effectiveness in using its working capital. The working capital turnover
ratio is calculated as follows:

Working capital turnover ratio = Net Sales / Net Working Capital

SL.NO YEAR NET SALES NETWORKING CAPITAL RATIO

1 2013-2014 3683017966 730193840 5.04
2 2014-2015 3977286613 776465749 5.12
3 2015-2016 3728293004 850052925 4.39

RATIO
5.2 5.12
5.04
5

4.8

4.6
RATIO
4.39
4.4

4.2

4
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 is 5.04 and it is increased to 5.12 in
2014-2015 and decreased from 4.39 in 2015-2016.
 ASSET TURNOVER RATIO
The asset turnover ratio is an efficiency ratio that measures a company‟s ability to generate
sales from its assets by comparing net sales with average total assets. In other words, this ratio
shows how efficiently a company can use its assets to generate sales.

Asset Turnover Ratio = Sales / Fixed Asset

SL.NO YEAR SALES FIXED ASSET RATIO

1 2013-2014 3683017966 155158097 23.74
2 2014-2015 3977286613 145894339 27.26
3 2015-2016 3728293004 139477345 26.73

RATIO
28
27.26
27 26.73

26

25

24 23.74 RATIO

23

22

21
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 is 23.74 and it is increased to 27.26
in 2014-2015 and at last decreased 26.73 in 2015-2016.
 DEBTOR TURNOVER RATIO
The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its
assets. Receivables turnover ratio can be calculated by dividing the net value of credit sales
during a given period by the average accounts receivable during the same period.

Debtors Turnover Ratio = Net Credit Sales / Average Accounts Receivable

YEAR NET CREDIT SALES AVERAGE ACCOUNTS RECIVABLE RATIO

2013-2014 3683017966 30030540 122.63
2014-2015 3977286613 28593506.5 139.1
2015-2016 3728293004 33546836 111.14

160
RATIO
140 139.1
122.63
120 111.14

100

80
RATIO
60

40

20

0
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 is 122.63 and it is increased to
139.1 in 2014-2015 and it decreased 111.14 in 2015-2016.
 DEFENSIVE INTERNAL RATIO
Defensive interval ratio is a liquidity ratio that allows your company the ability to meet the
daily expenses of the business or the debts. Your current liquid assets are sufficient to help your
business last without seeking outside revenues.

Defensive Internal Ratio = Quick Assets / Daily Cash Exp

YEAR QUICK ASSETS DAILY CASH EXP RATIO

2013-2014 378655657 67216250 5.63
2014-2015 562738969 65021500 8.65
2015-2016 747849531 69033570 10.83

RATIO
12
10.83

10
8.65
8

5.63
6
RATIO
4

0
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 is 5.63 and it is increased to 8.65 in
2014-2015 and at last again increased to 10.83 in 2015-2016.
 CASH FLOW FROM OPERATION
In financial accounting, Operating cash flow, cash flow provided by operations, cash flow
from operating activities or free cash flow from operations, refers to the amount of cash a
company generates from the revenues it bring in, excluding costs associated with long-term
investment on capital items.

Cash Flow from Operation = Quick Assets / Daily Cash Exp

YEAR QUICK ASSETS DAILY CASH EXP RATIO

2013-2014 154252409 1039961847 0.15
2014-2015 190076248 1036979102 0.18
2015-2016 246575422 730371923 0.34

RATIO
0.4
0.34
0.35
0.3
0.25
0.2 0.18
0.15 RATIO
0.15
0.1
0.05
0
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 ratio is 0.15 and it is increased to
0.18 in 2014-2015 and at last again increased to 0.34 in 2015-2016.
 INVENTORY PERIOD
In accounting, Inventory period is a measure of the average number of days inventory is held,
calculated by dividing the inventory by the average daily cost of goods sold. It is also called
days in inventory.

Inventory Period = 365* Average Inventory / Cost of goods sold

YEAR DAYS Average inventory Cost of good sold RATIO

2013-2014 365 199200724 2429557582 17.91

2014-2015 365 107404231 2770618297 14.15

2015-2016 365 63349155.5 2425117608 9.53

RATIO
20
17.91
18
16 14.15
14
12
9.53
10
RATIO
8
6
4
2
0
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 is 17.91 and it is decreased 14.15 in
2014-2015 and at last again decreased to 9.53 in 2015-2016.
 ACCOUNTS RECEIVABLE PERIOD
The accounts turnover ratio is calculated by dividing total net sales by the average accounts
receivable balance. The average collection period can be calculated using the accounts
receivable turnover by dividing the number of days in the period by the metric.

Accounts Receivable Period = 365*Average Receivable / Credit sales

YEAR DAYS Average receivable Credit sales RATIO

2013-2014 365 209732165 3683017966 20.79
2014-2015 365 407279260 3977286613 37.38
2015-2016 365 579114526 3728293004 56.70

RATIO
60 56.70

50

40 37.38

30
20.79 RATIO
20

10

0
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 is 20.79 and increased 37.38 in
2014-2015 and at last again increased to 56.70 in 2015-2016.
 ACCOUNT PAYABLE PERIOD
Days payable outstanding is a company‟s average payable period. Days payable outstanding
tells how long it takes a company to pay its invoices from trade creditors, such as suppliers. The
formula to calculate DPO is written as:

Accounts Payable Period = 365* Average Payable / Cost of goods sold

YEAR DAYS Average payable Cost of good sold RATIO

2013-2014 365 293280060 2429557582 44.06
2014-2015 365 327781046 2770618297 43.18
2015-2016 365 306163187 2425117608 46.08

RATIO
46.5
46.08
46
45.5
45
44.5 RATIO
44
44.06 43.18

43.5
43
42.5
42
41.5
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 is 44.06 and it is decreased 43.18 in
2014-2015 and at last increased to 46.08 in 2015-2016.
 CASH CYCLE
The Cash conversation cycle is a metric that expresses the length of time, in days, that it
takes for a company to convert resource inputs into cash flows.

Cash Cycle = Inventory period + Receivables period – Payable period

Inventory Period Receivable Period

YEAR (Days) ( Days ) Payable Period Days RATIO
2013-2014 17.9 90 60 47.9
2014-2015 14.1 90 60 44.1
2015-2016 9.5 90 60 39.50

20
47.9 RATIO
18
16
44.1
14
12
39.5
10
8 RATIO
6
4
2
0
2013-2014 2014-2015 2015-2016

Interpretation:

The table shows that interpretation at the year of 2013-2014 is47.9 and it is decreased 44.1 in
2014-2015 and at last again decreased to 39.5 in 2015-2016.
 OPERATING CYCLE
The operating cycle is also known as the cash conversion cycle. In the context of a manufacturer
the operating cycle has been described as the amount of time that it takes for a manufacturer‟s
cash to be converted into products plus the time it takes for those products to be sold and turned
back into cash.

DAYS INVENTORY SALES PAYABLE

YEAR OUTSTANDING OUTSTANDING OUTSTANDING RATIO

2103 - 2014 20.79 17.91 44.06 5.36

2014 - 2015 37.38 14.15 43.6 8.37

2015 -2016 56.7 9.53 46.08 20.15

RATIO
25

20.15
20

15

10 8.37
RATIO
5.36
5

0
2103 - 2014 - 2015 -
2014 2015 2016

INTERPRETATION
The table shows that interpretation at the year of 2013-2014 is 5.36 and it is decreased 8.37 in
2014-2015 and at last again decreased to 20.15 in 2015-2016.
 TOTAL APPROACH

SLNO COMPONENT 2013 - 2014 2014 - 2015 2015 – 2016

1 RAW MATERIAL 609427184 541809037 457316214
2 WORKING PROGRESS 127623371 100394906 47148989
3 FINISHED GOODS 110778077 114413556 79549322
4 SUNDRY DEBTORS 209732165 407279260 579114526
1057560797 1163896759 1163129051
5 ( - ) SUNDRY CREDITORS 293280060 327781046 306163187
TOTAL APPROACH 764280737 836115713 856965864

TOTAL APPROACH
856965864
836115713

764280737

2013 - 2014 2014 - 2015 2015 - 2016

INTERPRETATION

The table shows that interpretation at the year of 2013-2014 is 764280737 and it is increased
836115713 in 2014-2015 and at last again increased to 856965864 in 2015-2016.
 CASH COST APPROACH

SLNO COMPONENT 2013 - 2014 2014 - 2015 2015 – 2016

1 RAW MATERIAL 609427184 541809037 457316214
2 WORKING PROGRESS 127623371 100394906 47148989
3 FINISHED GOODS 110778077 114413556 79549322
4 (-) DEPRECIATION 25687323 42302069 32066597
5 SUNDRY DEBTORS 209732165 407279260 579114526
6 (-) DEPRECIATION 25687323 42302069 32066597
( - ) SUNDRY
7 CREDITORS 293280060 327781046 306163187
TOTAL APPROACH 712906091 1036992552 792832668

cash cost APPROACH

1036992552

792832668
712906091

2013 - 2014 2014 - 2015 2015 - 2016

INTERPRETATION

The table shows that interpretation at the year of 2013-2014 is 712906091 and it is increased
1036992552 in 2014-2015 and at last decreased to 792832668 in 2015-2016.
 FUND FLOW STATEMENT

`PARTICULAR 2014 2015 2016

Sources of Funds:-
Share Capital 9878000 9878000 9878000
Reserves & Surplus 886995445 929205067 994412796
Loans & Funds:-
Long term borrowing 128811 471775 326732
Deferred Tax Liability 19107555 319805 -
Long term Provision 9062601 15050460 17734296
TOTAL
Application of Funds
Fixed Assets:-
A)Gross Block 368413579 401304206 420735354
B)Depreciation 213255482 255409867 281258008
C)Net Block 155158097 145894339 139477345
CURRENT
ASSETS:-
Inventory 886968560 791746957 614446212
Sundry debtors 209732165 407279260 579114526
Cash in hand & bank 27721137 29465876 36554934
Short loan & advance 503285618 457691696 216400387
CURRENT
LIABILITIES:-
Sundry Creditors 293280060 327781046 306163187
Provisions 221838936 243991652 35831688
Short term loan 417147411 374706490 375738500
Net current assets 695441073 739704601 728782684
TOTAL 850599170 885598940 868260029
 WORKING CAPITAL FOR THE YEAR 2014 - 2015

ST
PARTICULAR BALANCE AS ON 31 WORKING CAPITAL
MARCH CHANGE

Current Assets 2014 2015 INCREASE DECREASE

Cash 27721137 29465876 1744739 -
Inventories 886968560 791746957 - 95221603
Sundry Debtors 209732165 407279260 197547095 -
Loans & Advances 503285618 457691696 - 45593922

TOTAL CA (A) 1627707480 1686183789 199291834 140815525

CURRENT
LIABILITIES

Sundry Creditors 293280060 327781046 - 34500986

Provisions 221838936 243991652 - 22152716

TOTAL CL(B) 515118996 571772698 - 56653702

Working capital
(A-B) 1112588484 1114411091 199291834
Net Increase in 1822607 1822607
WC

TOTAL 1114411091 1114411091 199291834 199291834

 WORKING CAPITAL FOR THE YEAR 2015-2016
ST
PARTICULAR BALANCE AS ON 31 MARCH WORKING CAPITAL CHANGE

CURRENT 2015 2016 INCREASE DECREASE

ASSETS

Cash 30538738 36554934 6016196 -

Inventories 791746957 614446212 - 177300745
Sundry Debtors 425171403 579114526 153943123 -
Loans & 226546556 216400387 - 10146169
Advances
TOTAL CA (A) 1474003654 1446516057 159959319 187446914

CURRENT
LIABILITIES
Sundry Creditors 391671906 306163187 85508719 -
Provisions 26983170 35831688 - 8848518

TOTAL CL(B) 4186550076 341994875 85508719 8848518

Working Capital
(A-B) 1055348578 1104521182
Net Increase 49172604 49172604
inWC
TOTAL 1104521182 1104521182 245468038 245468038
 FINDINGS

 The current ratio of the company was the highest (2.16) in the year 2016 and it was the
lowest (1.7) in the year 2014.
 The liquid ratio of thee company was the highest (1.02) in the year 2016 and it was the
lowest (0.36) in the year 2014.
 The working capital turnover ratio of the company was the highest (5.12) in the year
2015 and it was the lowest (4.30) in the year 2016.
 The Asset turnover ratio of the company was the highest (27.26) in the year 2015 and it
was the lowest (23.74) in the year 2014.
 The Debtors turnover ratio of the company was the highest (139.1) in the year 2015 and it
was the lowest (111.14) in the year 2016.
 The Defensive internal ratio of the company was the highest (10.86) in the year 2016 and
it was the lowest (5.63) in the year 2014.
 The Cash flow from operation of the company was the highest (0.34) in the year 2016
and it was the lowest (0.15) in the year 2014.
 The Inventory period of the company was the highest (17.91) in the year 2014 and it was
the lowest (9.53) in the year 2016.
 The Accounts receivable period of the company was the highest (56 .70) in the year 2016
and it was the lowest (20.79) in the year 2014.
 The Accounts payable period of the company was the highest (46.08) in the year 2016
and it was the lowest (43.18) in the year 2015.
 The Cash cycle of the company was the highest (47.9) in the year 2014 and it was the
lowest (39.50) in the year 2016.
 The Operating cycle of the company was the highest (20.15) in the year 2016 and it was
the lowest (-5.36) in the year 2014.
 SUGGESTION

 The short-term solvency position of the company was positive. The company should
maintain to meet its short-term obligations. The company has to remaining in the
standard norms and it maintains a healthy solvency position.
 The long-term solvency position of the company was positive. The company should
maintain higher than the generally accepted norm of moreover, the long-term solvency
position of the company was good satisfactory.
 The profit earning is considered essential for the survival of the company. A company
can discharge it obligations to the various segment of the society only through earning
profits. Profits are, thus, a useful measure of overall efficiency of a company.
 CONCLUSION

The present day study entitled “A Study on Working Capital Management at A.V.
Thomas Leather & Allied products pvt ltd. Chennai” was undertaken to analyze the financial
performance of AVT pvt ltd, Chennai. In order to analyze the financial performance, selected
financial ratios were used from which various interpretations have been drawn.

Hence suggestions are offered to the company for taking appropriate measures to improve its
functional efficiency so as to achieve optimum productivity. Concluding, it wholly to the
interests of the company to implement other suggestions offered n the study taking them into
consideration in the process of decision making.
 BIBLIOGRAPHY

BOOKS:-

 I.M Pandey – Financial Management – Vikas Publishing

th
House Pvt Ltd, New Delhi, 8 Edition, 2007

 S.N Mageshwari Sultan Chand & Sons– Financial Management

 T.S Reddy & Y. Hariprasad Reddy – Management Accounting – Margham Publications

Chennai – 600 017.

 R.K. Sharma & shashi K. Gupta Management Accounting , kalyani publishers, Seventh
revised edition, 2012.

 Khan M.Y & P.K, Finance Management, New Delhi, Tata McGraw Hill Publishing
company, Second Edition, 2004.

JOURNALS:-

 Annual report of AV THOMAS ALLIED AND LEALTHER PVT LTD, (2014-2016)

WEBSITES:-

 www.milindus.com
 www.co-operativesociety.com
 http://accounting-finace –tax.com/2009/2010/financial-statement-ratios-with-
interpretation/ual reports and other relevant
documents for the period commencing from 2013 – 2014 , 2014 – 2015, 2015 – 2016.